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Wednesday, March 05, 2008

The Future of Gas

Not many years ago, natural gas was widely regarded as the fuel of the future. Its use was growing at a much faster rate than for oil, and it offered important environmental benefits in terms of both greenhouse gas emissions and local pollution, relative to its main competitors, coal and oil. At least in the US, however, these perceptions were altered by a period of unexpectedly tight supplies and high prices, and the rapid growth of even greener energy sources, such as wind and solar power. A new campaign by gas producers aims to restore the fuel's luster, and at least from the standpoint of the facts they cite, this ought to be an easier sell than a similar campaign by the nation's coal industry. The larger question is whether gas supplies would be adequate to displace a meaningful proportion of other energy sources, as part of the solution to both energy insecurity and climate change.

The full-page ad that caught my attention appeared in this morning's Washington Post, with the headline, "We're Not Running Out of Natural Gas." It went on to cite recent large increases in North America's gas resource potential, based at least in part on the gas industry's success at exploiting gas from non-conventional formations such as shale and deep coal beds. In fact, unconventional gas now accounts for over a third of US gas production. As recently as 2000, estimates of proved and potential US gas resources equated to about 58 years of production at current rates, so the reported jump to 82 years is impressive. More significantly, US proved gas reserves have increased by 26% over the same period, while global reserves grew by 20%. So here's another resource for which the US consumes a fifth of the world's supply while holding only 3% of total reserves, yet it looks entirely sustainable for decades. It's less clear how much more it could increase, when the fastest-growing segment of US gas supply is LNG imports.

There are at least four pathways by which natural gas could displace petroleum products for transportation energy: as compressed or liquefied natural gas for modified internal combustion engines, via chemical conversion to liquid fuels such as methanol or diesel, via conversion to hydrogen for fuel cells or modified ICEs, or as electricity generated from gas for plug-in hybrids and electric vehicles. All offer consumers environmental, efficiency and operating cost improvements, though with up-front costs that may not be fully recovered by those benefits, as in the case of today's CNG car models. Producing enough vehicle fuel from gas to replace 10% of current gasoline consumption might require another 1.8 trillion cubic feet (TCF) per year, increasing US gas demand by 8%.

Gas could also be used to displace existing coal-fired power generation. Without fanfare, gas-fired electricity surpassed the contribution of nuclear power in 2006, despite the latter's steady and impressive improvements in on-line availability. Gas now accounts for 20% of US electricity supply, compared to 49% for coal. In the process, gas-fired power plants make up 30% of total US gas demand, up from just 22% in 2000. That expansion was achieved by squeezing out a large quantity of industrial demand. At that rate, replacing 10% of coal-fired power would require another 1.7 TCF/year of gas, adding 7% to total demand--or at the expense of other uses.

So in order for gas to make even modest inroads into oil's share of the transportation market and coal's share of electricity, without crowding out industrial and commercial users, US natural gas consumption would need to grow by about 15%, over and above the anticipated growth in traditional gas demand segments, while also providing most of the energy consumed by rapidly-expanding ethanol production. The reserves data and resource estimates confirm that there's enough gas. The real challenge, however, is whether it could be supplied without disrupting the price relationship between oil and gas--a 50% discount on equivalent energy, based on current futures contracts--that makes the prospect attractive in the first place, or without making gas less competitive with renewable energy sources, including wind turbines and solar thermal power. That would be a great question for the American Clean Skies Foundation to tackle.